Kenyan Shilling Seen Weaker Before Vote on Violence Fears

By Johnstone Ole Turana -
Jan 25, 2013

Kenya’s shilling will probably
weaken further over the next five weeks after hitting a 13-month
low yesterday as businesses accumulate dollars on concern March
4 elections may spark violence, according to a Bloomberg News
survey of traders and analysts.

The currency of East Africa’s biggest economy may fall 1.8
percent to 89 a dollar, the survey of eight analysts and traders
on Jan. 23 showed. The median forecast was for the shilling to
trade at 88 a dollar by voting day after falling to 87.73
yesterday, the worst intraday level since Dec. 13, 2011. Barring
any violence, it may then strengthen by year-end, according to
Solomon Alubala, head of trading at National Bank of Kenya Ltd.

“The political uncertainty surrounding the outcome of the
elections will be the key determinant on how the shilling will
trade in the market,” Alubala said in a phone interview. “The
shilling will decline to 88 a dollar and with a peaceful
election it will recover ground to trade at 86 per dollar, while
contested elections may push it further down.”

The shilling fell 0.7 percent this week to 87.45 a dollar
as of 5:17 p.m. in Nairobi. The currency is down 1.5 percent
this year following ethnic clashes last month, a widening
current account deficit and as the central bank lowers interest
rates to boost the flagging economy. Kenya is vulnerable to
election-related shocks following violence that occurred after
elections more than five years ago, the World Bank said in a
review of the country’s economy on Dec. 5.

Industries Collapse

More than 1,100 people died and another 350,000 were
displaced in ethnic clashes that followed disputed elections in
2007. The violence led to a collapse in agricultural output and
a tourism slump, the two industries that generate most of
Kenya’s foreign-exchange earnings. Growth slowed to 1.5 percent
in 2008 from 7.1 percent the previous year.

The shilling fell 9.9 percent between the vote on Dec. 27,
2007, and Feb. 27, 2008, the day before an accord to end the
violence was signed, according to data compiled by Bloomberg.

The currency is weakening at a slower pace than the South
African rand as policy makers intervene to slow the declines.
The currency of Africa’s largest economy fell yesterday to its
lowest since April 2009 and is down 5.9 percent this year, the
worst among 25 emerging markets monitored by Bloomberg.

The central bank has sold dollars each day since Jan. 18,
Nairobi-based NIC Bank Ltd. (NICB) said in an e-mailed note to clients
yesterday. An official at the central bank, who declined to be
identified in line with policy, said by phone from Nairobi today
that the bank sold dollars on Jan. 18 and all this week bar Jan.
21. The official declined to provide more details.

Continued Intervention

It will probably continue efforts to support the currency
by draining liquidity from the market through repurchase
agreements and selling dollars to smooth volatility, said
Christopher Muiga, a senior trader at Kenya Commercial Bank Ltd. (KNCB)
in Nairobi.

“We have seen the central bank intervening by selling
dollars and mopping up liquidity to ensure the shilling does not
decline rapidly, a position that will continue at least through
the first quarter,” Muiga said. Kenya Commercial Bank, the
nation’s largest, estimates the shilling will trade at 89 a
dollar on March 4 and 88 by Dec. 31.

The shilling weakened to a record of 106.75 a dollar in
October 2011 after a drought boosted inflation to almost 20
percent. The bank raised borrowing costs by 12.25 percentage
points to a record 18 percent in 2011 to bolster the shilling
and curb prices. It reversed that policy with four reductions
totaling 8.5 percentage points since July, the latest a 1.5
percentage point cut on Jan. 10 to take rates to 9.5 percent.

Growth Slows

Economic growth slowed in the first two quarters of 2012,
to 3.4 percent and 3.3 percent. The government forecasts the
economy will expand by about 5 percent in 2013, from 4.5 percent
last year. That compares with South African Reserve Bank
estimates released yesterday for growth of 2.5 percent in 2012
and 2.6 percent this year, while inflation may average 5.8
percent in 2013 compared with 5.7 percent last year.

Kenya’s current account shortfall is also adding pressure
on the currency, Leon Myburgh, an African strategist at
Citigroup Inc. in Johannesburg, said in an e-mailed note
yesterday.

The deficit on the current account, the broadest measure of
trade in goods and services, widened by 40 percent to $4.4
billion in the year to October from a year earlier, according to
the Central Bank of Kenya’s latest data. The nation’s foreign-
exchange reserves dropped to $5.26 billion on Jan. 17 from $5.4
billion on Dec. 27, according to central bank data.

Rivals Clash

Political parties in Kenya held primary elections last
week. Riots and looting erupted in towns including Kisumu, Homa
Bay and Siaya in western Kenya as supporters of rival candidates
clashed, according to the Nairobi-based Daily Nation. Protests
also took place in the Nairobi slum of Kibera, as well as in the
central and southeastern provinces of the country, it said.

“The primaries were not conducted well and that may have
indicated to investors the elections may not to peaceful,” said
Ignatius Chicha, the head of markets at Citigroup in Nairobi.
Citigroup sees the shilling at 88 a dollar by March 4 and 89 by
year end.

Kenyan President Mwai Kibaki has ordered security forces to
ensure the elections are peaceful.

Violence in Kenya since the start of 2012 left 450 people
dead and forced 112,000 more to flee their homes, according to
the United Nations. In one incident last month in the Tana River
delta in Kenya’s southeastern Coast province, at least 39 people
died in clashes between the ethnic Pokomo and Orma communities
that Police Inspector-General David Kimaiyo said were
politically motivated.

Hedging Positions

Kenya adopted a new constitution in 2010 after almost 20
years of promises from political leaders to replace one dating
back to the country’s independence from Britain in 1963. The
charter aims to spread political power among dozens of ethnic
groups and end quarrels over land distribution that were at the
heart of the 2008 violence. The nation of 41 million people held
its first multiparty elections in 1992. Every election since
then, bar one in 2002, has been marred by violence.

“Businesses are hedging their dollar positions,
accumulating to ensure they have enough for their operations,”
said Bernard Matimu, chief dealer at NIC Bank, who predicts the
shilling will reach 89 a dollar by the elections and 88 by Dec.
31. If the elections pass peacefully, “the shilling is expected
to recover ground” as businesses would have implemented capital
projects and on “expectations of increased foreign direct
investment,” he said.